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It occurs to me that my recent alarmist posts about national and global bankruptcy might give the wrong impression, for example, the impression that I am dead-set against Obama's deficit spending and bailout policies.
A very well-researched reader commented on my recent post to point out that, in percentage terms, our deficit was not yet unprecedented, and suggested that my concern was only warranted if I was against the idea of deficit spending, period. Many conservatives would be, but I am not necessarily, at least from a pragmatic standpoint. But before going into that, a brief remark to my well-researched reader. He raises an important point about the need to keep these numbers in perspective, and I am aware that our deficit spending in WWII was worse. The reason I see such cause for alarm is
1) That was a war, the largest war in history. Deficits were understandable, and ought to end as soon as the war did.. This isn't a war, and it's far from clear when the deficits might end.
2) The total national debt in WWII was much lower, so huge deficits were not quite as much cause for concern. Having several big leaks in an empty boat is not nearly as scary as having them in a boat already half-underwater.
3) As I posted last week, the official national debt is only a fraction of the real debt, which is pretty close to insurmountable. As a cynic who believes the American Empire is fast dooming itself to the kind of bankruptcy that all other empires have suffered, I tend to think that Obama's deficit spending is helping us drive off the brink.

All that said, though, I don't necessarily think Obama's doing the wrong thing, at least from a pragmatic standpoint. My general philosophy is that we're driving off the brink almost no matter what, not that Obama in particular is driving us off the brink. And so I actually want to speak up, maybe not quite in defense of his recent policies, but at least against loud detractors on the right. Many of these detractors, including most everyone I know, have a knee-jerk reaction against "more big government," "more wasteful bailouts," "fearmongering as an excuse for more government power," and so on. This, to me, is rather shortsighted and ignorant. To me, the claim that government intervention is always worse than a private-sector solution is only tenable on the basis of a priori philosophical/ethical commitments.
As a consistent Christian, I am very suspicious about government action on any front, but I am equally suspicious of the free market's actions. And so it is hard for me to see how a government solution is automatically stupid, incompetent, and certain to compound the problem. So what if the government is bureaucratic, inefficient, and wasteful? I'm sure it is. I'm sure it's a very clumsy tool for resolving economic problems. And so normally, the private sector will offer better solutions. If you've got a car in a ditch, then you want to call the tow truck that can get there quickly and get it out cheaply and safely. But if you've got an eighteen-wheeler in a deep ravine, you're going to need to call in the only tow truck that's got a massive crane, even if it's slow and expensive. If a problem is big enough, the government may simply be the only entity capable of resolving it, however inefficient the solution may be.

And so it is in this case. Conservatives who decry the bailouts also tend to downplay the problem. For example, Dr. Leithart said in a recent blog post,

"The Commerce Department tells us this morning that the GDP grew during 2008, though at the slowest pace since 2001. It shrank faster during the fourth quarter than at any time since 1982.

Funny, nobody in Congress is raising the spectre of 1982 to describe our economic woes. It’s always 1929. They must have long memories.

Or maybe they find some value in blowing up the scale of the crisis? Maybe they’ve found some uses for panic."


I don't mean to pick on Dr. Leithart particularly, for this is a sentiment you find everywhere in conservative circles. But this simply shows ignorance about what's going on. If anything, those in the government have been trying to downplay the crisis, because they know that if they can boost sentiment enough, the crisis will start improving. Those in the Bush administration spent all last year denying what all good economists knew--that we were royally screwed. And the Commerce Department's report that Dr. Leithart alluded to was its earlier report that GDP had shrunk by 3.8%, which anyone who'd been watching them revise numbers for the past year could've known was a sham. Sure enough, they just revised it to a 6.2% contraction. And of course that hasn't passed the 1982 numbers yet--we're still in the early stages of this collapse. Some numbers don't lie, such as the astounding 53% fall of the stock market, which really is unparalleled since 1929, and the staggering hundreds of billions of continuing losses at financial institutions that have been repeatedly rescued.

I agree with the general philosophy of doubt toward government bailouts and stimulus packages, but the fact is, we are in much deeper than it seems many people yet realize. So, while I might critique details of the policies with which our leaders are trying to save the situation, and I'm skeptical of the results of any plan, I'm willing to grant that there really is nothing else to do but attempt massive governmnent rescues. To continue to mock the whole idea of such rescues, as stupid, useless, or alarmist is simply to continue ignoring the kind of problem we have on our hands.

1 comments:

Good post--I think I share your general temperament with regards to the whole thing.

A few things, though:

The total national debt in WWII was much lower, so huge deficits were not quite as much cause for concern.

This is not true, if you measure US debt in GDP. In WWII the US public debt peaked at about 110% of GDP:

http://en.wikipedia.org/wiki/File:USDebt.png

I'm pretty sure I heard somewhere that Obama's plan will put us into 60% territory (which is still high, of course).

It's also kind of interesting to compare our debt-load with other countries in the G20. Check out Japan's frightening 170%:

http://blog.prospect.org/blog/ezraklein/stimtable-thumb-200x230.jpg

On a separate note, with regards to what Dr. Leithart says about the 1982 comparison, it is certainly true that it "shows ignorance about what's going on", but not for the reasons you give here. Today's crisis and what happened in 1982 are completely different situations.

Back then, the Fed interest rate was very high--at like 20% at one point--and so when the economy got really painful (with unemployment rates as high as we're seeing today), they slashed the interest rate down to 7%, thus boosting demand and pulling us out of the recession. However, today, the Fed cannot slash the interest rate, for the simple reason that the interest rate is already at 0%--the lower bound. Since the government can't generate demand by lowering interest rates, it has attempted to do it by massive deficit spending. The last time the government had to resort to deficit spending to prop up demand because of a 0% interest rate was--the Great Depression. So that is why the comparison to 1982 is invalid--because back then, unlike now, the Fed had plenty of room to slash the interest rate.

I'm pretty sure all this is uncontroversial stuff that economists of all ideological bents would agree with (although I should be clear that I myself am just a layman). I'm not saying that it's necessarily wrong to accuse Obama of exploiting an atmosphere of crisis--I'm just saying that comparing the current crisis to the 1930s instead of the 1980s is, in fact, the correct comparison to make on the merits.

March 6, 2009 at 7:45 AM  

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